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VMware Inc. Cuts Guidance Despite Solid Results

By Timothy Green - Jan 30, 2016 at 7:14PM

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The virtualization company also announced employee layoffs and named a new CFO.

VMware (VMW -0.56%), a cloud infrastructure and virtualization solutions provider, reported its fourth-quarter results on Jan. 26 after the market close. The company beat analyst estimates for both revenue and earnings, growing both GAAP and non-GAAP earnings by double-digit percentages. Some strategic moves, including job cuts and executive departures, were also announced. Despite the solid fourth-quarter numbers, VMware cut its revenue guidance for 2016, and now expects far slower growth going forward.

VMware results: The raw numbers


Q4 2015

Q4 2014

Growth (YOY)


$1.87 billion

$1.70 billion


GAAP Net Income

$373 million

$326 million










Data source: VMware Q4 2015 earnings release.

What happened with VMware this quarter?
VMware reported growth in both license and services revenue during the fourth quarter, while currency had a negative impact.

  • License revenue rose 6% year over year to $825 million. Adjusting for currency, revenue rose by 11%. Services revenue rose 12.6% year over year to $1.04 billion.
  • Excluding the negative impact of currency, VMware would have grown total revenue by 12% year over year.
  • Free cash flow totaled $429 million for the quarter, up 36% year over year. The company spent just $75 million on share repurchases during the fourth quarter, down from $250 million during the prior-year period.
  • License revenue plus the sequential change in unearned license revenue rose 2% year over year, or 6% adjusting for currency.

VMware also announced some strategic moves.

  • It will lay off 800 employees and take a GAAP charge of between $55 million and $65 million during the first half of the year.
  • CFO and COO Jonathan Chadwick is leaving the company. Zane Rowe, the CFO of EMC, has been appointed the new CFO of VMware. The company said Chadwick "has decided to leave VMware and expand his advisory roles, working with a number of companies as a non-executive board member."

The company lowered its guidance for the full year.

  • Total revenue is expected between $6.785 billion and $6.935 billion, representing 2%-4% growth. The company had previously guided for revenue growth in the high single to low double digits.
  • Non-GAAP EPS is predicted to come in between $4.07 and $4.16, compared to $4.06 in 2015.

What management had to say
CEO Pat Gelsinger highlighted the success of its emerging products:

VMware's Q4 2015 was a solid finish to 2015. We were especially pleased with the growth across our portfolio of emerging products and businesses, including NSX, End-User Computing and Virtual SAN. All of these businesses demonstrated strong growth in both Q4 and for the full year, underscoring the momentum we expect to continue into 2016.

NSX total bookings are now at an annual run rate of over $600 million, while Virtual SAN bookings are at an annual run rate of over $100 million.

The departing CFO pointed to solid margins during the fourth quarter and the full year:

Our Q4 and 2015 results met or exceeded our revenue and operating margin expectations for the quarter and the year. We are seeing the results of our product transitions and have positive momentum with our newer solutions heading into 2016.

Looking forward
Shares of VMware have tumbled by about 40% over the past year, and the announcement of layoffs and a guidance cut certainly won't help the cause. If VMware hits its new guidance for 2016, it will represent a significant slowdown compared to past years. Some of its smaller businesses, like NSX, the company's network virtualization platform, are growing quickly, but it won't be enough to prevent revenue growth from slowing to a crawl in 2016.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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